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Title:Productivity, welfare and reallocation: theory and firm-level evidence PDF Logo
Authors:Basu, Susanto
Pascali, Luigi
Schiantarelli, Fabio
Serven, Luis
Issue Date:2009
Series/Report no.:IZA Discussion Papers 4612
Abstract:We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that reflect respectively technical change, aggregate distortions and allocative efficiency. Then, using the appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries.
Subjects:Productivity
welfare
reallocation
technology
TFP
JEL:D24
D90
E20
O47
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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